Civil service pensions are not really too dear

Thursday 25 February 2010 12:14 BST

Cuts: George Osborne noted public sector pensions as a target for the Tory knife

Ten years ago when private-sector pensions were still flourishing, no one cared much about pensions in the public sector. Last night in the heavily trailed Mais lecture, Shadow Chancellor George Osborne singled them out as one of the first targets for an axe-wielding Tory Government.

It's probably good politics even if it's bad economics. The majority of private-sector employees have been decanted out of the traditional schemes guaranteed by their employer into less generous schemes where they bear all the risk. Public-sector pensions have for the most part remained unchanged and are a source of envy.

In this case, perception matters more than reality. Tax relief paid on private-sector pension contributions actually costs more than the burden on the taxpayer of public-sector pensions. But the perception is that a huge and unsupportable burden is building up and getting worse. Politicians conjure up a vision of a massive injustice in future where private-sector employees with no decent pension of their own will be expected to provide for someone else through taxation.

This fear will soon become even more acute when the next round of triennial valuations start to surface in April. They apply to the one-fifth of public-sector schemes which are funded in the same way as those in the private sector and, theoretically, the numbers thrown up will be horrific with schemes which were 80% funded three years ago coming out as only 60% covered.

But this is what happens when interest rates which are rock bottom are used today to calculate what future liabilities will cost — liabilities are inflated way beyond available assets, painting a picture of huge deficits, and the fact that interest rates are only temporarily low is conveniently forgotten so the figures can be used to terrify the taxpayer.

Thus, in the coming election campaign where the need for long-term cuts in government spending is likely to be the central theme, the cost and sustainability of public-sector pensions could be one of the most emotive topics. Osborne has already indicated this. Yet it is hard to imagine an atmosphere more conducive to seriously wrong decisions.

It makes no sense at all to destroy public-sector pensions just because that is what happened in the private sector. Nor in the long term would it save any money.

Though the image of the public-sector pensioner is one of a Sir Humphrey-style senior civil servant enjoying his comfortable index-linked retirement, the reality is that most public-sector pensions are for very small sums. The average local government pension is about £4,000 a year and is paid to retired nurses, police, fire-fighters, teachers and a host of others whom you would never classify as town hall or Whitehall bureaucrats.

In addition there are huge numbers of part-time workers — women mainly — whose average entitlement is less than £2,000. Taking away pensions from these employees will simply impoverish them in retirement so they are forced to rely on means-tested state benefits which in turn would wipe out any saving to the taxpayer.

And think of the numbers. We are talking about 25% of the entire UK workforce, some six million people. The quality of the debate urgently needs to be raised before lasting damage is done to public-sector pensions and yesterday the London Pension Fund Authority, on behalf of all local government pensions schemes, held a conference to try to do just that.

One result was a call from the authority's chairman Anthony Meyer for an independent commission, as they have in Holland, which would monitor schemes and have the power to adjust benefits up or down and increase or decrease contributions to maintain them in good financial health.

This strikes a chord with private sector schemes too. It is one of the great failures of the past 10 years that government did not step in to save company pension schemes, by allowing them to vary the rules so that schemes could be made more affordable.

Had it done so the current disaster could have been averted because it would have allowed cost-conscious companies to trim benefits as an alternative to closing a scheme altogether. None of these adjustments is rocket science — less inflation linking, more restricted spouse benefits, payments accruing to a maximum of half rather than two-thirds of final salary, a later retirement age, increased levels of employee contribution — any one of these would make a huge difference to the sums. Of course they also make the pension less generous which is why it becomes affordable; but a less generous employer pension is still a lot better than no pension at all.

What we need to do while there is still time is to see which, if any, of these measures could be applied to public-sector pensions. The time may well be ripe, as Joanne Segars, chief executive of the National Association of Pension Funds, suggested yesterday for an inquiry similar to the one chaired by Adair Turner which led to the creation of the new state second pension. What we do not need is the assumption that they are already beyond the pale and the only solution is to take the axe to them.

Unfortunately in the current political atmosphere there is a fair chance that that is what we will get.